MMAs and MMMFs: Know the differences
|  Dear
Dr. Don,
Could you please tell me the differences between money market
accounts (MMAs), mutual funds and money market mutual funds (MMMFs)? What are
the advantages and disadvantages of each? Thanks!
-- Ed Education
 Dear
Ed,
I start out by classifying anything that's covered by government
deposit insurance -- the FDIC for banks and NCUSIF for credit unions -- as bank
product. A money
market account is a bank product. Since FDIC- and NCUSIF-insured deposits
carry a full faith and credit pledge of the United States government, they're
very secure.
A money market mutual fund is one type of mutual fund. Mutual
funds typically invest in some combination of stocks, bonds or cash. A
money market mutual fund invests solely in cash. The term cash
is financial shorthand for money market instruments. Money
market instruments are short-term debt obligations with a final
maturity of less than a year.
Money market mutual funds (MMMFs) are classified by
what they invest in. The first classification investors should
consider is taxable versus tax-exempt funds. Tax-exempt MMMFs
invest in state and local money market instruments. Investors compare
the tax equivalent yield on tax-exempt funds against the yield on
taxable funds to decide whether it makes sense to invest in tax
free funds. Choosing the right tax-exempt fund is further complicated
by the state you live in and the state(s) the fund invests in. Not
all tax-exempt income is tax-exempt. In general, tax-exempt
investors should invest in MMMFs that invest in their home state's
tax-exempt debt, but the tax issue is actually a little more complex
then that. If you're considering investing in tax-exempt MMMF
you should discuss the tax impact with your tax adviser, although
an earlier Dr. Don column
can point you in the right direction.
Once you get past the taxable versus tax-exempt decision,
you need to consider what the type of money market instruments the
fund invests in. I'm going to focus on taxable funds in this
discussion. Taxable MMMFs invest in some combination of government,
agency and corporate money market instruments. As you would
expect, MMMFs that invest in corporate money market instruments
pay a higher yield then MMMFs that invest in Treasury short-term
debt.
Investment managers
of money market mutual funds work very hard to not "break the buck"
by keeping the value of a fund share at $1. A fund's investments can lose value,
and that loss in value can cause the share price to decline -- breaking the buck. Money
market mutual funds aren't bank product and aren't covered by deposit insurance. The
additional risk to investors is considered to be minimal for most MMMFs, but that's
a cold comfort if your fund breaks the buck. You can use Bankrate
to compare rates, both locally and nationally, for money market
accounts
and money
market mutual funds. The MMMFs are segregated by taxable and tax-exempt funds. Two
things to consider besides yield and risk are convenience and check-writing abilities. Money
market investments are liquid and if you need to tap that liquidity it should
be convenient to do so. There's not one best MMA or MMMF, just one that can
best meet your needs.
Mutual funds that invest in stocks and bonds are a
whole other column.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "Financing
a home," "Saving & investing" or "money."
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